Taggart Inc's stock has a 50% chance of producing a 21% return, a 30% chance of producing a 10% return, and a 20% chance of producing a -28% return.What is the firms expected rate of return?
Please help
To calculate the expected rate of return for Taggart Inc's stock, we can multiply each possible return by its corresponding probability and then sum them up.
Let's denote the three possible returns as R1, R2, and R3, with their respective probabilities P1, P2, and P3.
R1 = 21% (probability = 50% = 0.5)
R2 = 10% (probability = 30% = 0.3)
R3 = -28% (probability = 20% = 0.2)
To calculate the expected rate of return (E(R)), we use the formula:
E(R) = R1 * P1 + R2 * P2 + R3 * P3
E(R) = (21% * 0.5) + (10% * 0.3) + (-28% * 0.2)
Calculating the above expression:
E(R) = 10.5% + 3% - 5.6%
= 7.9%
Therefore, the firm's expected rate of return is 7.9%.
To calculate the firm's expected rate of return, we need to multiply each possible return by its respective probability and sum them up.
Given the probabilities and returns:
- 50% chance of a 21% return
- 30% chance of a 10% return
- 20% chance of a -28% return
We can calculate the expected rate of return as follows:
(Expected Rate of Return) = (Probability 1 * Return 1) + (Probability 2 * Return 2) + (Probability 3 * Return 3)
Let's substitute the respective values into the formula:
(Expected Rate of Return) = (0.50 * 0.21) + (0.30 * 0.10) + (0.20 * -0.28)
Simplifying the equation, we get:
(Expected Rate of Return) = 0.105 + 0.03 - 0.056
(Expected Rate of Return) = 0.079
So, the firm's expected rate of return is 7.9%.